2.3 The difficulties of using target costing in service industries
Target costing was introduced by major Japanese manufacturers for use in a manufacturing environment where:
§ a new product was to be designed to meet the target cost
§ a substantial part of the production cost consisted of bought-in materials.
§ This environment facilitates use of a target cost approach since:
§ Professional design teams can alter the design specification of a new product until it matches their cost requirements.
§ Very large manufacturers such as Sony and Toyota are able to exert considerable pressure on (usually much smaller) suppliers to reduce their prices.
Service industries (e.g. banking, insurance, travel) provide a less favourable environment for the use of target costing: